European Business News (EBN), 97-07-16

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From: The European Business News Server at <http://www.ebn.co.uk/>

Page last updated Wed, July 16 6:08 PM CET

CONTENTS

[01] Grand Met, Guinness reject LVMH proposal to merge their drinks operations

[02] ITT's board approves plan to split into three independent public companies

[03] British Telecom says renegotiation of MCI merger is possibility

[04] Despite strike, GM profit rises 11%, while Ford Earnings rise 33%

[05] Eastman Kodak net drops 14% in quarter on strong dollar

[06] German Economics Minister says Boeing concessions to Europe insufficient

[07] Police search for gay serial killer after Versace murder

[08] UK June unemployment falls to a 7-year low; wage growth slows

[09] EU says eastward expansion is unlikely to have strong impact on EMU

[10] Inflation data gives ground for increasing optimism about the health of the US economy

[11] US industrial production rises 0.3% in June

[12] France may announce special measures for '97 budget on Monday

[13] Corporate and Economic Briefs

[01] Grand Met, Guinness reject LVMH proposal to merge their drinks operations

The companies said although the proposals are significantly different from LVMH's plans last week, they would leave the French luxury good company with 'back door control without paying a premium, and its hard to see how this could be in the interests of our other shareholders.'

But both companies agreed along with their advisers to study LVMH's proposal in detail. 'The debate here is not about merger versus demerger. It is about creating the most value for our shareholders and ensuring that such value is fairly shared,' said both chairmen in the statement.

Arnault's proposal, submitted to both companies earlier today, would give him 'back door control without paying a premium, and it is hard to see how this could be in the interests of our other shareholders,' they said.

The proposal is part of Arnault's attempt to block the planned £24 billion ($40.2 billion) merger between GrandMet and Guinness, to create GMG Brands, which threatens to sideline LVMH. LVMH holds a 14.2% stake in Guinness and has built up a 6.4 percent holding in GrandMet since their merger plans were announced in May.

Earlier LVMH proposed the merger of its Moet Hennessy cognac and champagnes business with the United Distillers division of Guinness and International Distillers & Vintners of Grand Met.

LVMH proposed taking a stake of some 35 percent in the new grouping, in exchange for its 66% stake in Moet Hennessy and its holdings in Guinness and GrandMet.

[02] ITT's board approves plan to split into three independent public companies

ITT said the three new companies will be: ITT Destinations, a hotels and gaming company; ITT Corp., whose sole asset will be 100% of ITT World Directories; and ITT Educational Services, a provider of post-secondary technical education.

ITT also plans to buy back 30 million shares, or about 26% of its total shares outstanding, for $70 a share, or $2.1 billion total, through a cash tender. In connection with the allocation of debt obligations between ITT Destinations and the World Directories company, ITT also plans to offer to buy back the total $2 billion of existing ITT public debt, through a tender offer later this year.

ITT shareholders will retain their ITT Corp. stock (which will now represent ownership of World Directories), as well as receive one new share in ITT Destinations and about 0.25 of a share of ITT Eductional Services for each existing ITT share.

Also Wednesday, ITT said its board again voted unanimously to recommend ITT shareholders reject Hilton's $55 per share partial tender offer and the proposed second-step merger.

[03] British Telecom says renegotiation of MCI merger is possibility

'The important thing is to take time (to) thoroughly analyse the situation before renegotiating,' Vallance said.

At BT's annual meeting in Edinburgh, Vallance called for calm on ahead of a thorough review of MCI's strategy. BT, whose planned $20 billion merger was rocked last week by an unexpected profit warning from MCI, denied reports that it was seeking two top-level resignations at America's second biggest long-distance carrier.

Instead, Vallance emphasised that BT would be working with MCI to decide how best to respond to what he called significant change in the U.S. telecoms market. In a show of confidence, he also praised the American company's 'courage and skill' in breaking into new markets. 'The important thing at the moment is to take time to look sensibly and thoroughly at the U.S. market...be calm, analyse and act in shareholders' best interests.'

BT also denied a Wall Street Journal report which said that under the merger terms any change in MCI's local U.S. business would not qualify as a 'material adverse' event which could prompt renegotiation.

BT will be partly looking at whether MCI's investment plans in local U.S. markets, which will ring up higher than expected losses, can or should be altered and if the merger terms need to be re-negotiated to take account of a sharp fall in both BT and MCI's share price.

Both sides can of course still agree to walk away from the deal, an option which analysts say is unlikely.

'Until we have completed our review, we cannot give you explicit guidance as to the implications,' Vallance told shareholders.

Asked how long the review was likely to take, a BT spokesman said: 'How long is a piece of string?' He added that until the review was completed, BT could not comment on the future of the merger. Vallance, fielding a barrage of questions at the meeting from mainly small investors, attempted to assure his audience that the U.S. market and BT's relationship with MCI remained of key strategic importance.

But after conceding surprise and disappointment following MCI's forecasts last week of higher losses because of problems breaking into the $100 billion local U.S. telecoms market, he dismissed a suggestion that he was 'an English muffin which Americans eat for breakfast'.

[04] Despite strike, GM profit rises 11%, while Ford Earnings rise 33%

Both companies' earnings were higher than analyst estimates. For Ford, the average estimate of 17 analysts surveyed last week by First Call was $1.82 a share. For GM, the average estimate of 13 analysts was $2.15 a share.

GM's higher earnings came despite strikes at two assembly plants that the company said cost it an estimated $490 million after taxes from lost production of 96,000 cars and trucks in the second quarter. 'It's significant that even though strike-related losses hit the bottom line pretty hard in the second quarter, we still earned a substantial amount of money during the period,' GM Chairman John F. Smith Jr. said. Ford credited its increase to wide-ranging cost cutting and strong sales of pickups and sport-utility vehicles with high profit margins. 'Today's results come from several years of very tough work. Thanks to great teamwork, our strategy is continuing to pay off,' said Ford Chairman Alex Trotman. GM's North American Operations earned $474 million, compared with $705 million a year ago. GM's international operations earnings were $488 million, compared with $ 424 million in the year-ago quarter. For the first half of this year, GM earned $3.9 billion, or $4.98 a share, up from $2.91 billion, or $3.57 a share, in the first six months of 1996. GM's revenues in the second quarter were $45.1 billion, up 1% from $44.7 billion a year ago. For the first half, revenues were $87.4 billion, up from $84 billion in 1996. Second-quarter 1996 results for GM included a $208.8 million loss from the spin-off of its Electronic Data Systems Corp. subsidiary.

Ford's U.S. auto operations earned $1.2 billion, up from $697 million a year earlier. Foreign operations in the quarter earned $543 million, compared with $411 million.

Ford reported revenues of $40.3 billion in the quarter, up from a restated $39 billion in revenues during the same period of 1996.

For the first half of this year, Ford earned $4 billion, or $3.33 a share, compared with $ 2.56 billion, or $ 2.15 a share, in 1996. Revenues were $76.5 billion, compared with $74.2 billion in the first six months of last year. While Ford's car sales have been down about 9% from last year, truck sales have risen 4%. Chrysler Corp. on Friday reported quarterly earnings of $483 million, a 53% drop from the same quarter a year ago.

[05] Eastman Kodak net drops 14% in quarter on strong dollar

In the year-earlier period, the company earned $440 million, or $1.30 a share.

Sales were $3.9 billion, compared with $4.2 billion a year ago. Kodak's NYSE-listed shares recently were down 9 3/8, or 12.2%, at 67 1/2 on volume of nearly 2.6 million, compared with average daily volume of about 1.3 million.

The photography and imaging giant said that while it remains optimistic about its long-term prospects, it will be difficult for the company to increase 1997 operating earnings-per-share beyond 1996 levels.

[06] German Economics Minister says Boeing concessions to Europe insufficient

'Boeing has offered things which are not enough,' Rexrodt told a news conference. 'The decisive things are the terms of exclusive contracts and the spill-over of military technology (into civilian areas) - that is clearly not enough.'

He was speaking as antitrust experts from the EU's 15 states met for the second time in a month to discuss the $14 billion merger which the Commission believes would strengthen Boeing's dominant position in the world's civil aviation market.

The EU's competition watchdog has the power to block the deal under EU law. Were Boeing to ignore a ruling against it, the Commission could fine it up to 10% of its turnover and fine any European companies doing business with the U.S. aviation giant. Commission sources said the EU could also seize any new planes being delivered in Europe.

Industry representatives and Brussels-based lawyers believe this will not happen because Boeing would not want to shut itself of the European market, which accounts for 30% of total aircraft orders, and because both sides are aware of the strong trade and political implications.

Boeing shares closed at $58, up 7/8, on Tuesday, close to their year high. 'Nobody completely believes it will be blocked,' one lawyer said.

Because of this view perhaps, the legal community had been speculating Boeing would improve its offer before the antitrust experts met as the EU's advisory committee on mergers and acquisitions. The experts unanimiously recommended on July 4 that the merger should not be allowed in its current form.

But an eleventh hour deal, which has happened before in fights between large multinationals and the EU executive, seems increasingly unlikely, some say.

They stress that it may be too late for Boeing to weigh the financial and legal implications of any serious concessions and that it may come back later with a new proposal with appropriate amendements.

'I don't think Boeing ever took the EU regulatory approval as a serious matter. It was more of a formality, a question of being polite,' another lawyer said.

A source close to the negotiations said it seemed like a 'reasonable scenario' that Boeing would re-file a modified deal rather than challenge a Commission ban.

[07] Police search for gay serial killer after Versace murder

Versace, who dressed celebrities the world over in his colorful, sexy designs, died Tuesday morning on the sun-soaked streets of South Beach, where he felt comfortable enough to stroll alone for his morning newspaper.

Police said a lone gunman shot the 50-year-old designer in the back of the head twice at close range. Their prime suspect is one of the FBI's most wanted fugitives: Andrew Cunanan, a 27-year-old fugitive suspected in the slayings of four men from Minneapolis to New Jersey.

'We've been actively looking for him since April,' said Paul Philip, head of the FBI in Miami. 'Everybody's at risk. Everybody's got to help us put this guy in jail.'

Versace, returning home after buying a copy of an Italian newspaper, was gunned down outside the gates of his Mediterranean-style mansion in view of passers-by.

Martin Weinstein said he heard gunshots and ran down the street. 'And when I arrived I saw a guy lying on the step in a pool of blood. At first I didn't realize who it was. But then I realized it was Versace.'

Miami Beach Police Chief Richard Barreto said the shooting was not a random act of violence. Versace was the target.

South Beach, with its thriving gay community and wild party scene, is the kind of place Cunanan could fit in easily. Police, acquaintances and his mother say Cunanan is a prostitute who catered to wealthy men.

Versace was gay, but investigators said they didn't know of any previous link between Cunanan (pronounced koo-NAH-nin) and Versace.

'It's not clear that he knows all his victims,' Philip said.

Authorities considered Cunanan armed and dangerous and contacted gay and lesbian organizations in South Florida to see if anyone recognized him. The FBI distributed 2,000 fliers with the suspect's picture and information about the previous killings.

'Right now we're reaching out to you folks, to everyone in the community,' Philip said at an evening news conference.

Investigators said Versace was shot by a white man in his mid-20s, dressed in a white or gray shirt and dark shorts and carrying a backpack. The man fled on foot.

Witnesses led police to a five-story municipal parking garage nearby, where a man fitting the description of the suspect was seen.

There, police found a red Chevrolet pickup truck that investigators said Cunanan stole from his last known victim, William Reese, a cemetery caretaker in New Jersey. The truck had a South Carolina license plate that had been missing for a month or two, said Joyce Watts, the mother of the man it was registered to. Clothing under the truck was traced to Cunanan, police said.

Police described Cunanan as 5-foot-8 (1.73 metres) and 160 to 180 pounds (72 to 81 kilogrammes) with brown hair and brown eyes.

Barreto would not confirm the type of handgun used to kill Versace and said they did not have the weapon. WTVJ-TV in Miami quoted unnamed police sources as saying Versace was shot with a .40 caliber handgun, the same caliber weapon used in the murders Cunanan is suspected of committing.

Cunanan, a Filipino-American, is charged in the May slaying of Minneapolis architect David Madson, who had once been his lover. He is the prime suspect in the killings of Jeffrey Trail, another former boyfriend in the Minneapolis area, and Chicago millionaire real estate developer Lee Miglin.

[08] UK June unemployment falls to a 7-year low; wage growth slows

Other economic data released today showed a 24% increase in foreign investment and a higher-than-expected rise in June's public sector borrowing requirement to £4.75 billion.

The Office for National Statistics said the number of unemployed dropped 36, 500 to 1.6 million last month, the lowest since April 1990. The 5.7% jobless rate was the lowest since August 1990. The ONS said the data confirmed 'continuing growth' in the labour market, with employment rising at between 25,000 and 40,000 a month, while unemployment is falling at between 20,000 and 35,000 a month, so, few analysts were surprised by another cut in the dole queues. But a drop in annual average earnings growth to 4.25% in May, from 4.5% the month before, was a shock.

Economists expected 4.5% growth and said the lower rate of increase eased pressure on the Bank of England to raise interest rates to keep the lid on prices.

The FTSE-100 index of leading shares leapt more than 50 points to a new record of 4,950 after the figures, and government bonds rallied.

The seasonally-adjusted rate of increase was slower than the 4.5% economists were expecting. A total of 37,000 working days were lost through strikes in May, compared with 47,000 in April, and 8,000 in May 1996.

Foreign direct investment in Britain climbed 24% last year to a record £9.34 billion, ($15.7 billion) the Department of Trade and Industry confirmed. According to an annual report to be released later today, the figures were boosted by several new projects, including one by South Korea's LG Electronics to build a £1.7 billion electronics complex in South Wales.

New reports earlier said the report will conclude that the US remains Britain's largest source of direct investment, accounting for £3.9 billion of the 1996 total. South Korea followed with £2.7 billion of direct investment last year.

Public Sector Borrowing figures were also released. The data showed borrowing in June was £4.75 billion compared with a forecast 4.15 billion. Analysts said June's total was pushed up by higher-than-expected gilt interest payments.

Although the monthly total was above expectations, cumulative borrowing for the three months of the current financial year is below the same year-ago period at £8.52 billion against £9.95 billion.

The minutes to June's Bank of England Committee meeting were also released and showed decision to raise interest rates by 0.25 point in the wake of the meeting was unanimous. The committee argued demand growth remained strong, sterling's strength had not dampened export growth and that underlying inflation wouldn't meet its 2.5% target unless rates increased

[09] EU says eastward expansion is unlikely to have strong impact on EMU

The European Union's executive body announced its top prospects for expanding the 15-nation trading bloc - Poland, Hungary, the Czech Republic, Slovenia, Estonia and Cyprus. E.U. Commission President Jacques Santer told the European Parliament the six nations would have to improve their economic performance and respect democratic rules if membership is to become a reality.

In a section of the report entitled, 'The Challenge of Enlargement,' the Commission noted that new eastern European members will 'modify the institutional and economic balance' between the participants and the non- participants in the euro zone, but won't endanger the single currency.

The E.U. executive warned candidate countries that if they fail to adopt the kinds of policies expected of non-participating member states when they join the E.U., it could 'endanger the stability' within the euro zone. However, the Commission noted that even if this were the case, the economic weight of the candidate countries relative to the likely euro-zone countries is so small that any adverse impact would be limited.

'I stress that important additional efforts are necessary to make membership possible in the medium-term,' Santer told the assembly.

The European Commission's advice on membership front-runners carries considerable weight. EU government leaders meet at a summit in December to make the final choice of candidates for the first round of membership talks.

Ten East European countries were hoping for invitations to start the talks early next year. Slovakia, Romania, Bulgaria, Latvia and Lithuania were rejected for the first round. But Santer insisted they should persevere with their membership drive despite today's disappointment.

'Nothing the Commission proposes today signifies a rejection of those candidacies,' he said. Santer encouraged the five nations to continue economic and political reforms to prepare themselves for membership at a later date.

[10] Inflation data gives ground for increasing optimism about the health of the US economy

The Bureau of Labor Statistics said consumer prices rose just 0.1% in June, an increase that held the rate of growth in the key measure of U.S. inflation to 2.3% over the last 12 months.

The performance was more impressive for the first six months of 1997, with consumer prices up 1.4%. That was the lowest rate of increase for a similar period since 1986.

More significantly, the core rate of CPI inflation, which excludes food and energy, turned in its best six-month performance in 32 years. The measure rose at a 2.4% rate in the first half of 1997, marking the smallest increase during that period since 1965. The core rate rose 0.1% in June.

'There just aren't any inflation pressures,' notes Stuart Hoffman, chief economist at PNC Bank.

The data are unambiguously positive news for the financial markets and Fed policy makers because they further allay fears that robust growth and low levels of unemployment are boosting inflation.

Significant about the recent moderation in prices is that it's occurred while the economy has maintained a strong rate of growth. 'It's very surprising because we're seeing softening prices while growth has accelerated,' says Dan Seto, economist at Nikko Securities.

While economists marvel at the lack of inflation in the economy, many remain concerned that underlying forces in the economy will boost prices yet. Still, there's currently little in the pipeline to worsen the recent price trend.

Looking forward to next month, for instance, BLS senior economist Patrick Jackman, notes that seasonal adjustment factors could boost the gasoline component of the CPI. That's because the seasonals are looking for a 1.5% decline in July and anecdotal evidence so far suggest that increase isn't yet occurring. He cautions, however, that seasonal risks in July are confined to gasoline, which accounts for only 7% of the CPI.

[11] US industrial production rises 0.3% in June

'Continued strength in commercial aircraft and the high-technology sector again contributed importantly to the growth of output,' the Fed said, as did a rebound in motor vehicle production from strike-depressed levels in April and May.

The May rise had previously been estimated at 0.4%. The April rise had previously been estimated as 0.3%.

The Fed's index of the output of the nation's factories, utilities and mines stood last month at 119.9% of the 1992 average. That index is up 3.8% from a year earlier. Manufacturing production last month increased 0.3%, after rising 0.3% in the previous month.

The production of business equipment rose an adjusted 0.8% last month after rising 0.4% in the previous month. The output of consumer durable goods increased an adjusted 1.4% after rising 1.4% in May.

The output of materials rose an adjusted 0.1% in June after rising 0.1% a month earlier.

Autos were assembled at an adjusted annual rate of 5.8 million units last month, unchanged from the assembly pace of the month before.

[12] France may announce special measures for '97 budget on Monday

Tax hikes and corporate taxes may be levied following the release of the public finances audit Friday

French government spokeswoman Catherine Trautmann said that the government may announce special measures for the 1997 budget next Monday if needed.

Ministers will tomorrow present to Prime Minister Lionel Jospin possible measures based on different scenarios concerning the 1997 budget deficit, Trautmann said.

An audit of public finances which will measure the trend of the deficit will be given to the government this Friday and will be released to the public around 0700 GMT on July 21. Trautmann declined to comment on whether the 1997 deficit is currently on track to be above 3.5% of gross domestic product. Earlier in the day, finance minister Dominique Strauss-Kahn also declined to comment. Two weeks ago, he said he believed the trend was above 3.5% to 3.6%, and that measures would be taken to shave 'some tenths' of a percentage point. Speaking to journalists following the weekly cabinet meeting, Strauss-Kahn said he hopes the deficit will be 'as low as possible.' He acknowledged, however, that it will likely be above 3% of GDP.

Finance ministry officials have already indicated that corporate taxes on 'healthy' companies and taxes on the wealthy could be raised. A scheduled cut in income taxes also could be cancelled.

[13] Corporate and Economic Briefs

The U.K.'s largest insurer Prudential Corp. said that worldwide single premium life, pension and investment product sales reached £3.6 billion ($6 billion) for the six months ended June 30, up 22% from $2.95 billion a year earlier. 'Following a very good performance in 1996, we are continuing to enjoy sales growth in all our major operations around the world,' said Prudential Chief Executive Sir Peter Davis in a statement. In the U.K., single premium sales (those premiums paid in a single lump sum) rose 16% to £1.82 billion from £1.57 billion a year earlier, while regular premiums (premiums paid monthly) increased 16% to £182 million from £157 million.

De Beers Centenary, the offshore diamond arm of South Africa's De Beers Consolidated Mines, said it has signed a new diamond mining agreement with the government of Guinea in west Africa. De Beers said in a statement the agreement allows for De Beers to manage any mine developed as a result of its exploration in Guinea. It also provides for diamonds produced at any new mines to be sold through the Central Selling Organization, De Beers' diamond purchasing and marketing arm.

The president of Germany's Federal Labor Office reiterated that he is expecting a rise in employment this fall and an average unemployment level of about 4.3 million people for 1997, according to an interview in today's edition of the German daily newspaper Die Welt. 'I am strongly convinced that in September at the latest more people will be employed,' Bernhard Jagoda is quoted as saying. In June, employment in Germany rose a seasonally adjusted 11,000 to a jobless rate of 11.0% with 4.22 million unemployed.

A steep rise in June consumer prices led to a gush of sell offers against a trickle of buy offers on the Tel Aviv Stock Exchange this morning. Soon after prices started to move, the two top indices were down around 1.0%. Analysts said they expect stocks to slide 1.0% to 2.0% by the end of the day. Sell offers outstripped buy offers in the morning trading session by a margin of 160 million shekels to 12 million shekels, said Yossi Weidenfeld, an investment consultant at Eyal Securities. 'The sentiment is that the market will go down' at least 1.0%, primarily because of the unexpectedly high rise in the CPI index, Weidenfeld said.

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